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Your Very Own "Just Starting Out in Business Guide"

The lovely Liz at MoneyBee has created this amazing "Just Starting Out in Business" document which should answer all those business/money/tax related questions. We all know how confusing it can be to get your head round that side of it.

  • How do I register as a new sole trading business?

  • You don’t. The most you have to do is to register for self-assessment. This will put you on the HMRC radar and let them know they might be getting some tax off you when Self-Assessment time comes. They will send you a reminder to self-assess in the April after you register

https://www.gov.uk/log-in-file-self-assessment-tax-return/register-if-youre-self-employed

  • What happens then?

    • You will receive a UTR (Unique Taxpayer Reference). You need to keep this safe as you will need it to report your profits to HMRC. You can then Self-Assess any time after April 6th.

  • I have only just started my business – do I need to do this NOW?

    • No, not really. You don’t have to report any income until it reaches over £1000.

BUT

  • It is worth registering if this is your ONLY income as it allows you to pay voluntary NICs – which count towards your state pension, maternity allowance, tax free childcare costs etc.

  • What about Companies House though? Do they need to know?

    • No – not unless you want to be a Limited company (e.g., ‘Things Ltd’). There is no requirement to do this unless you want to – there are pros and cons to it (but that’s a whole other factsheet) … for now, while you’re starting out, it’s simpler to be a Sole Trader.

  • What records do I need to keep? And how do I keep them?

    • Basically, everything to do with money coming into or going out of your business. This can be in any way that makes sense to you. At the end of the tax year, you need to be able to add up all the money that’s come in, then take away all the money that’s gone out. This should leave you with your profit (or loss) for the year.

    • This profit (or loss) is what you need to tell HMRC about and they will then tax you on it.

    • Most popular methods are a paper cash book or a basic Excel sheet.

    • You can use an accounting software package if you wish – Xero and Quickbooks are very popular, but there is a cost involved.

  • Do I need to keep receipts and bills?

    • Ideally, yes. These can be used to prove and spending if you are audited. These can be saved in a folder, a bag or by taking photos (useful for some till receipts which fade quickly). However you keep them, you should make it easy for yourself to find each one again if needs be – so date order, or by supplier is a good idea.

  • Audit? Will I be audited?

    • It is possible but not really very likely. HMRC do pick people at random each year though, so prepare your records as if you are going to be audited – then if you are it’ll be easy peasy to breeze through it. You need to be able to prove or at least explain every transaction in your accounts.

  • I’ve always had an employer – how does tax work now?

    • When you are employed, the payroll department of the business sorts out the tax for you and it is paid over to HMRC as PAYE (Pay As You Earn). It is taken out of your wages before you are paid each month and so you don’t have to think about it.

    • Now you are self-employed, you don’t pay your tax until the end of the tax year (the end of March). To work out how much you owe HMRC, they need to know how much you have earned. It is largely based on trust and you declaring your income honestly.

  • Will I have to pay tax? If so, how much?

    • This depends on how much you earn and your personal circumstances.

      • Everyone gets a tax-free allowance of £12500* each year. This means you can earn up to £12500 before you have to start paying tax.

      • Then, between £12501 and £50000 you will pay 20% tax (basic rate)

      • Between £50001 and £150000 you will pay 40% tax (higher rate)

      • Over £150000 you will pay 45% tax (higher rate

      • Example – You earn £160,000 in a year

PLEASE REMEMBER! The tax owing is calculated on ALL of your income – so if you have an employer or other taxable income, your self-employed income will be added on to that.

  • What about national insurance etc?

    • If your profits are more than £6475 or more for the year, you pay £3.05 per week for Class 2 NI

    • If your profits are £9501 or more for the year, you pay 9% up to £50k and 2% on profits over £50k

  • Should I put aside money for a tax bill throughout the year?

    • Yes – this is always a good idea. If you can afford to put 20% aside, then do so. Chances are that you will not owe as much as that (due to the £12500 tax free allowance), which means you will have some savings if you need them.

    • HMRC have a calculation tool that helps you know how approximately much to save https://www.gov.uk/estimate-income-tax

  • Will I Have to pay VAT?

    • No, not straight away. Unless you voluntarily register for VAT, you can just ignore the VAT on anything you sell or anything you buy. It is an offence to charge VAT when you are not VAT registered.

  • How does VAT work then? When will I have to think about it?

    • VAT is a 20% tax that is added on at the point of sale by a VAT registered company. It is an easy way for the government to collect taxes.

    • Most items have VAT added to them, but some do not – these can be zero rated or exempt (both have 0% VAT but are treated slightly differently in your accounts and by HMRC)

    • A company does not have to register for VAT until their annual taxable turnover reaches £85k.

    • A company can register before it reaches the threshold if it makes sense to do so – e.g. a ground coffee seller would be advised to register as they don’t charge VAT on their sales (they are zero rated), but can reclaim it on their purchases.

  • Do I need a business bank account?

    • You do not need a ‘Business’ bank account, but you do need a separate account for the business.

    • As a sole trader, you can just use a personal bank account for your business – there is no law that says you have to have a special ‘Business’ account.

    • A ‘Business’ accounts is just a product that the banks sell. You do need to be mindful that a bank can assess how you use your personal account though, and if they tell you that they are closing your account because they think you’re using it for business, then they are within their rights to do so.

    • Also, ‘Business’ bank accounts do come with some good perks – like free business advice and easier access to loans if needed. It’s worth looking into them and making your own informed decision.

  • Do I need to hire an accountant?

    • Not at this stage – unless you want to of course. It might be worth paying for an hour or so of an accountant’s time if you still have queries as it’s way better to get it right from the start than it is to sort things out after a year of trading.

  • Where can I go for advice?

    • Of course, www.money-bee.co.uk is always there for you, or on Facebook @MoneyBeeLizH

    • HMRC are actually incredibly useful! Go to https://www.gov.uk/browse/business

Thanks for reading and GOOD LUCK with your venture!

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